Economy still in the woods :New government must revive private investment

The stock markets may have rallied in the hope of a stable government and recovery in the economy, but the latest data suggests there are still no signs of the latter as industrial production contracted 1.9% in February.

What is evident from the fall in the production of capital goods (-17.4%) and the consumer durables (-9.3%) is that both investment and consumption demand remains weak. The expected recovery in the global economy is also not giving a boost to India's exports, which fell 3.14% in March.

In normal situation, the standard policy prescription would have been to cut interest rates and step up government spending to stimulate demand and investment. Both options are ruled out as of now. High inflation rules out a reduction in interest rates. On the contrary, if the monsoon turns out weak as feared because of El Nino and food inflation starts to climb again, rates may even have to be raised. Fiscal stimulus is even a lesser choice because of the already stressed finances of the government.

What can be done then? The key to growth still lies reviving in investments, particularly in infrastructure. Interest rates are only one determinant of investment decision and to the extent the rest of the eco system can be improved, one can hope that private investments will pick up pace.

In fact, that would actually be the big challenge for the new government that takes over in New Delhi after the elections. How to get corporate to invest?

Thankfully, there is no rocket science involved in that. It's simply a case of faster and transparent decision-making. Why is a project/decision stuck and who is responsible for that?

The UPA-2 did pay attention to that, belatedly though. The project monitoring group in the cabinet can be given an institutional shape to speed up decision. The Rakesh Mohan committee has talked about one ministry for infrastructure. These are all ideas that can be explored.

No matter which way you look at it, India is where it is simply because the investment pipeline got clogged. And that needs to be addressed to first before we embark on the task of reviving manufacturing.